Gold prices buffered by retail buyers despite traders' bearishness

The U.S. Comex gold futures fell 1.76% on Wednesday and rebounded 1.48% on Thursday to end at $1,467.60, a decline of 12.4% year-to-date. The Dollar Index surged 0.91% on Thursday to 82.224 after falling 1.23% in the beginning of the week. The Euro/Dollar dropped 0.87% on Thursday after the ECB cut rates. The S&P 500 index ended up unchanged in the past two days while the Euro Stoxx 50 index rose 0.25%.

Chinese Housewives Taking On Wall Street Short-Sellers?

According to a local Hong Kong newspaper, the largest fall in gold prices in 30 years prompted the Mainland Chinese tourists to buy about 60 tonnes of gold in Hong Kong during the three-day Labour Day holiday. After this surge of buying, physical demand will inevitably slow down although it is clear that gold is highly regarded as precious gifts for the younger generations and a store of value in Asia, providing support to gold prices and prompting the short-sellers to cover. On the other hand, the CFTC reported that speculators have reduced their net-long gold positions by 25% in the latest reporting week while they maintained the second-largest short positions in gold since the beginning of the data in 2006.

Central Bank Actions - Different Gold Reactions

The U.S. Fed recently maintained the pace of bond purchases at $85 billion per month. However, the Fed would be ready to increase or decrease the pace of bond purchases depending on the economic data, changing the market expectation that the Fed can only reduce its pace of bond purchases going forward. The slowdown in the March payroll data, a weaker inflation, the tightening of fiscal policy as well as a lower U.S. ISM manufacturing data have prompted the policy maker to remain flexible in its monetary policy. The gold futures nevertheless fell 1.76% on Wednesday as the market still expects the U.S. to grow faster in the next four quarters, leading investors to buy more equities than gold. The gold-backed ETP holdings fell again by 0.9% this week as of Wednesday and dropped 369.3 tons this year. On Thursday, gold demand and prices increased after the ECB cut the refinancing rate by 25bp and raised the possibilities of a negative deposit rate for the banks and further stimulus down the road.

What to Watch

The market will zero in on this Friday's April non-farm payroll data and the unemployment rate in the U.S. Next week, we will watch for the Chinese April trade numbers and Germany's March industrial production data on May 7, the Bank of England's monetary policy announcement and the Chinese April inflation number on May 9 as well as the Fed's speech on May 10.